Vanguard Settles SEC Charges Over Target Date Fund Disclosures for $106 Million
From the desk of Jim Eccleston at Eccleston Law
Vanguard has agreed to pay $106.41 million to settle charges by the Securities and Exchange Commission (SEC) over alleged disclosure failures related to its target date retirement funds (TDFs). InvestmentNews reports that the settlement aims to compensate harmed investors and highlights critical issues surrounding taxable distributions and fund management transparency. The SEC’s order stems from Vanguard’s 2020 decision to lower the minimum investment requirement for its institutional TDFs from $100 million to $5 million.
According to InvestmentNews, this change prompted many customers to shift their investments from other TDF share classes into the institutional versions, leading to significant redemptions. To meet these redemptions, Vanguard sold underlying assets from the affected share class, resulting in large taxable capital gains distributions for remaining investors in taxable accounts.
Retail investors in the Investor share class, who did not switch to the institutional TDFs, were left with unexpected tax liabilities and missed opportunities for compounding growth. The SEC found that Vanguard failed to adequately disclose how the investment threshold change would impact shareholders, violating federal securities laws.
As part of the settlement, Vanguard neither admitted nor denied the SEC’s findings. The firm emphasized its commitment to investors, stating, “We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options.”
Target date funds are widely used in retirement planning, designed to gradually shift from higher-risk investments to more conservative ones as investors approach retirement. While these funds are generally held in tax-deferred accounts such as 401(k) plans, the distributions in this case affected taxable accounts, exacerbating the financial impact on shareholders.
The SEC’s order revealed that redemptions from Vanguard’s investor-class target funds soared to $130 billion between December 2020 and October 2021, up from $41 billion during the same period the previous year. Vanguard ultimately merged the two fund series but delayed the decision, a move the SEC noted was partially influenced by fee revenue considerations.
This $106 million settlement is the largest regulatory penalty ever imposed on Vanguard, according to Jeff DeMaso of Independent Vanguard Adviser. It follows a $40 million class action settlement Vanguard had already paid to investors over the same issue.
In 2023, Vanguard also faced an $800,000 fine from FINRA for issues with account statements for money market funds in 2019 and 2020. According to InvestmentNews, these violations occurred under former CEO Tim Buckley, with current CEO Salim Ramji assuming leadership in 2024.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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